And cutting out the middlemen…

Late last year Ecotricity launched a new initiative and, as it turns out, a new product. We dubbed it Ecobonds and it was a runaway success.

We set out to raise £10 million and we actually received some £15 million in applications with another £3 million that didn’t make it in on time. It was a huge success.

We’d been considering launching a bond issue for a year or two. We had two main purposes in mind.

The first was to fill a funding gap that we knew would arrive one day. Our model at Ecotricity is to use customer energy bills to build new sources of Green Energy – something we describe as “turning Bills into Mills” and it’s a model that works very well. When we build a new Green Energy project we use a mixture of debt and equity, typically 80% debt and 20% equity. We fund the 20% equity from our own resources, from the money we make. And we’ve always known the day would come when our project pipeline, those consented and ready to build, would outstrip our ability to self fund the equity part. Creating the Funding Gap.

And this is where the Ecobond idea came in, as a potential way to raise that equity proportion as debt – I think that’s known as Mezzanine Debt – and it comes with a hefty interest rate, typically 13 to 15%. Which would kill most of our projects. We looked at it but couldn’t make it work.

Our second main purpose was to give something back to our customers, many of whom over the years had asked how they might be able to get involved in our work, financially. And we also wanted to give people a way to get involved in the Green Energy revolution (financially) – without having to install stuff on their roof tops. Not everybody wants to do that and not everybody can.

Anyway, that’s the background.

In the summer of 2010 we could see our Funding Gap coming for 2011 and we started to flesh out the idea.

We reached out to customers and non customers via our web site, to get feedback on the concept and its main terms. The clear message we got from that was that five years was too long and £1,000 too big a minimum. So two of the eventual key terms of our Ecobond came out of that – a four year term and £500 minimum. The idea was to make this bond issue as accessible to all as we could. Our customers helped us do that.

At the same time – we were also aware that bank rates for savers were at historical lows; despite the fact that banks were asking very high rates from businesses that they were prepared to lend to. It seems like the incredibly low base lending rate (0.5%) is only relevant to savers (what the banks pay) and not to borrowers, strange that. There are probably something like five percentage points difference, between what a bank pays savers and what it charges borrowers like us. We thought that was a bit of a rip off.

And so our Ecobond became a way to ‘cut out the middlemen’ the banks who, post the credit crunch were paying savers very little, while lending to business for much more. We thought Ecobonds could introduce a little fairness into the financial sector.

And funnily enough, that’s exactly how Ecotricity got started. It was back in 1995, I was trying to get a fair price for a new kind of electricity (the green kind), from windmills – and the big electricity companies just laughed at the idea and refused to pay anything like a fair price; without which building more windmills was looking impossible. But since the electricity market had just been liberalised and anyone could set up an electricity company, the monopoly they had been comfortable with was no longer in place.

Ecotricity was set up to ‘cut out the middlemen’ and go direct to the end user of electricity, to get a fair price.

Ecobonds is a very interesting parallel, 15 years later, it’s a way to cut out the middlemen – a way for savers to lend their money directly to us.

That’s our Ecobond then – a power to the people kind of initiative, a novel way to raise finance, for green progress – and to engage with people and get things done between us. It’s innovative, pragmatic, populist and commercial all at the same time….. 🙂

We launched it as a four year bond, with £500 minimum and a quite generous 7% interest rate – which we boosted to 7.5% for customers.

And it went down a storm.

With £15 million of applications we had a good and bad situation – we had raised the £10 million we needed, but would have to disappoint some people – and give £5 million back (How awful…. 🙂 ).

We spent a week modelling outcomes, to try and strike a balance between prioritising customers (for their years of support to us) and at the same time not massively disappointing all those people who were not customers, but clearly willing to support our work.

We ended up allocating about 70% to customers and 30% to others.

In making that choice we also willingly chose to pay more interest than we needed to (customers getting half a percent more). We were chuffed to do that.

And we’ve started work on the UK’s first grid scale Sun Farm – which we gained consent for in December last year. We break ground in a couple of weeks and should be up and running by March.

In total we’ve got 20MW of Wind and Sun projects planned for construction in 2010 – a 40% increase in our capacity – all funded (the gap part anyway) by Ecobonds.

Oh – and I’m off to Number 10 next week to present the Ecobond concept – no really I am… 🙂

It seems that we’ve created a way to speed up the rate at which we can build green energy projects (that the UK so badly needs). Good job too since we have about 150MW in the planning system now and another 100MW goes in this year.

It’s a very exciting outcome and opens the way to a big increase in our work.

Ecobonds are set to become a permanent part of what we do – we now have a financial product to offer with a very Eco outcome, alongside energy.

Ecobond Two is in planning and expected launch end of this summer in readiness to fund our build plans for 2012.

I believe I heard that EB1 *was* wrapped up for some people for their ISAs or SIPPs. I’m no financial engineer but possibly you create a OEIC/mutual fund to buy the bonds on behalf of the investors and make the OEIC units available through the ISA/SIPP/etc to achieve the right level of transparency and so on to keep the Revenue happy.

Or use an alternative (cheaper) market than LSE.

But what do I know? B^>

Rgds

Damon

Jeffrey Lam

January 13, 2011 at 10:29 pm

Damon
are you referring to AIM by any chance?

I don’t know about bonds and funds, but AIM shares aren’t allowed in ISAs either…

Something like that: but I certainly do not know the detailed rules for what’s allowed in such wrappers. I have had thoughts in the past of creating somesuch and even briefly spoken to the FSA, but never got a round tuit… %-P

Rgds

Damon

Brian Gooch

January 12, 2011 at 9:59 am

Great project and awesome outcome. I’m just hoping that we’ve moved before EB2 so that we know what our financial position is and if we have anything to invest!

Sounds great! I’ve one question though, presumably in four years time Ecotricity will have to return the £10m plus ~7.5% to the investors? This ‘liability’ wouldn’t exist if the funding gap had been filled by Ecotricity profits as it had in the past. What happens in four years time when presumably Ecotricity will still want to be building infrastructure at a faster rate than cash flow allows yet the bonds will be due?

Alex Heighton

January 12, 2011 at 12:42 pm

The liability will still exist, yes, but it will only be payable to the customers who want their capital back and apply for it. If nobody does a thing, the capital just rolls over. I, for one, won’t be taking my money out unless it all goes wrong for me personally!

Very much my view too. This is structured to make it easy to leave money in; I’m regarding it more like a long-term share investment than a savings issue.

Rgds

Damon

Dale Vince

January 12, 2011 at 3:04 pm

Hi Chris, good question and Alex and Damon offer a good answer here – the money (or much of it) can and will (i’m sure) be rolled over.

But there’s more to know.

As part of the compliance process for getting these bonds away our ‘advisors’ produced a financial model which showed that the interest and the capital could be repaid from Ecotricity profits in the four year period. It was a crucial part of the process, without which we couldn’t make the offer.

So the worst case is covered.

And it was a rather conservative forecast used IMO….:)

Cheers.

Jeffrey Lam

January 13, 2011 at 10:57 pm

Hi Dale, I’ve been eagerly awaiting this post.

Your reply (and the post as a whole) does go some way to answering the questions I had earlier.

But there are still questions I’d like to know the answer to:

– does your spending on capital return 7-7.5%? i.e. for every £1 you spend, do you get 7-7.5p of net profit per year? My study of the company accounts suggests not, but am I wrong?

– but if I am right and you don’t get a return that high, will some of the interest and the capital you pay back after four years be funded by your existing profits?
Extrapolating your net profit figures for the next four years does not make £10million + 4*£750,000.

So my study suggests future profits from spending the bond money won’t pay for the interest (and repay the capital) by itself, and existing profits won’t pay it all either. But perhaps a combination of the two might.

Anyway, if your ‘advisors’ produced a financial model that showed everything can be repaid, then that is reassuring, and I don’t have to worry about either not getting my money back or about ecotricity being dragged back in a few years time by a debt millstone and not being able to build.

But alas, I was not able to get my application in on time. However, I’ll be investing in EB2 when it comes

Regards
Jeff

Dale Vince

January 17, 2011 at 9:06 pm

Hi Jeff, Thanks for waiting patiently…:)

I think your main question is does our ‘spending on capital returns 7%’

My guess is that you mean our spending on new green energy projects (capital equipment perhaps). It makes sense because that is what we’ve primarily raised the bond for.

The answer is yes, actually we get more than that from our projects.

If you’re trying to judge that by looking at our accounts, you’ll be hindered by the impact of the all the other things we do, across the group. It would be very hard to isolate/ identify project rates of return from our accounts, but they are typically over 7%.

So the projects we invest the Ecobond money into will pay all of the interest and some of the capital over four years.

Other capital (repayments)will come from Ecotricity’s general trading.

I hope this helps. There def is no need to worry for us….:)

I hope EB2 will work better for you.

Cheers.

Jeffrey Lam

January 17, 2011 at 10:18 pm

Hi Dale,
thanks for that. There is something in the accounts called “Capital expenditure”, but I realise that doesn’t necessarily mean building sources of green energy.

Quite possibly I’ve been using the word “capital” incorrectly. Maybe I should just stick to using it in sentences like “London is the capital of the UK” 🙂

Cheers

Jonny Holt

January 13, 2011 at 12:38 am

Hello Dale,

Very interesting to read the backstory. I wish I had been in the position of being able to participate this time around but circumstances conspired against me. I just hope I can get involved in EB2 – although a lower price (£250 – £300 perhaps?) would make it easier. Any chance of this happening or is £500 as low as you can go?

Best regards,

Jonny.

Dale Vince

January 13, 2011 at 1:44 pm

Hi Jonny,

We can go as low as we like in theory, I think the main disadvantage is an increased admin cost/burden if we have a great number of small amounts.

That’s the dynamic in the decision – access to all versus admin cost. Remembering that we pay (raise cheques and post them) interest twice a year for example.

That said, I’m not adverse to looking at a lower threshold if it would help.

Thanks for the suggestion.

Cheers.

Paul Verbinnen

January 15, 2011 at 5:55 pm

Rather than post out cheques twice yearly, would it be cheaper to pay directly to accounts as companies with shares do for their dividends?

I think they’re doing that – iirc there was a space on the form to put your bank account number, but it’s an option, so they still have to send cheques to anyone who didn’t choose that route.

(Personally, cheques are a bit annoying for me as my bank has no branches near me, I have to send them off by post – the refund for the bit of the bond I didn’t get is the first time I’ve had to do this in years – shame they couldn’t have made that a bank transfer as well.)

I put about half my savings into this. Don’t particularly need those savings for anything at the moment, so if it all goes tits up, not really a problem, it’s only money. Hope it works though – I don’t mean just in a financial sense of getting my interest payments and ecotricity not going bust, I mean, actually building more wind turbines 🙂 I’m sure the money will help but obviously can’t fix the planning system…

–sam

Jonny Holt

January 28, 2011 at 1:25 am

Hello Dale et al,

I couldn’t find the right blog category for this so you will just have to accept that I am going off-topic.

The economist is running an on-line debate entitled “This house believes that natural gas will do more than renewables to limit the world’s carbon emissions.” The debate is due to end on Wednesday 4th February.

At present 36% of those who have voted have supported the motion, with 64% opposing.

I think this is a great idea, I have only just come across it but am really impressed by your post and how invovled people have been in comments. I think these ideas are what make the difference. Looking forward to reading more about ecobond2 and hoping to get involved

Jeffrey Lam

February 23, 2011 at 10:38 pm

Hello Dave,
seeing as no-one else has responded to you, I thought I’d just say it’s nice to hear your comments. Please do join in any conversations that may pop up in future.

Regards
Jeff

glen andersson

March 4, 2011 at 8:29 am

Hi Dale

Do you have any plans to expand your model beyond Britain ? In Australia we have (mainly) very cheap, extremely dirty coal-fired power and excellent wind, solar and geothermal resources.

Hi Jeffrey – sorry for the slow reply. We’re currently looking at the project pipeline and rate of spend of Ecobond one – to judge the right time to go for Ecobond 2. it’s only a matter of when not if.

Now that the government have definitely killed big solar, things are a little clearer.

My best guess is that we’ll launch our second bond either Sept/Oct this year or Jan/Feb next year. We’ll know for sure in a few weeks time.

Hope this helps.

Cheers.

Alex Heighton

July 12, 2011 at 4:40 pm

“When and not if” is the answer I was hoping for! I had better start setting aside more for issue 2 then, especially if we’re provisionally looking at September. Please keep us all posted.
Cheers
Alex

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